Why Asia won't help U.S. curb its trade deficit
Why Asia won't help U.S. curb its trade deficit
Andy Mukherjee, Bloomberg, China
A first-ever full health check of Asian banks by Standard & Poor's has offered revealing insight into why the U.S. current account deficit may not unravel soon.
Out of the 27 Chinese, Indian, Thai, Indonesian, Philippine and South Koran lenders rated by S&P on its nine-point Bank Fundamental Strength Ratings scale, none could manage to score more than a humble C+.
A majority of the region's banks ended up with D or D+. The worse the score, the higher the probability that lenders would need to seek external assistance in the event of financial distress, the rating company said in a press release yesterday.
Weak Asian banks, says Deutsche Bank AG economist Sanjeev Sanyal, are a key reason why the region will continue to run large current account surpluses -- and the U.S. a deficit -- puzzling analysts who find it historically and theoretically counterintuitive that fast-growing developing economies such as China and India should lend capital to rich nations.
Asia doesn't yet have a banking system that can mobilize domestic savings efficiently and invest them prudently. In China, banks have contributed to widespread overcapacity; in India, they have cheaply financed the government's budget deficit.
That financial weakness makes it necessary for the region's central banks to buy insurance against external shocks by exporting capital into their foreign reserves, a US$2.5 trillion treasure chest of U.S. Treasuries and other "safe" securities.
The alternative to reserve buildup is for Asia to clean up its banks, which could take years to do. Meanwhile, the region may have to forgo a golden opportunity presented by a preponderance of working-age people in the population.
"Foreign reserves provide protection from external crises," Sanyal said in an interview in Singapore.
"They may not resolve the problem of poor capital allocation," Sanyal said, "but they do keep the virtuous cycle of demographic dividend feeding into a high savings rate and strong economic growth from coming to a premature end."
China, it's now widely acknowledged, has an enormous over- investment problem, which stems from the influence Communist party officials wield on lending decisions.
"Political power still plays a decisive role in China's capital allocation," says Andy Xie, Morgan Stanley's chief economist for Asia. "Local governments couldn't create excess capacity without the help of a state-owned financial system."
The paradox is that if Chinese banks become more prudent and start investing less, the gap between domestic savings (47 percent of gross domestic product) and investments (44 percent of GDP) will widen, pushing up China's current account surplus (3 percent of GDP) even higher.
Alternatively, China can reduce its current account surplus by encouraging citizens to spend more and save less. That might be very difficult to do immediately, since China's high savings rate is primarily a product of its bloated working-age population.
According to statistics compiled by the United Nations, 71 percent of China's 1.3 billion people currently belong to the age group of 15 to 64. For India, the ratio is 62 percent.
Japan is aging. China has until 2015 before the share of working-age population starts falling steeply as a result of the country's one-child policy. India's youth bulge can potentially drive accelerated economic growth until 2035; the Philippines will be at its demographic peak in 2040.
Other Asian nations fall between Japan and the Philippines. "If each country is able to take advantage of the demographic opportunity," said Deutsche Bank's Sanyal, "Asia can remain the world's growth engine for the first half of the 21st century."
Latin America also can join the party. Brazil's population age profile is similar to India's, while Argentina, which has begun reversing a four-decade-long retreat from its demographic prime, will once again have a surfeit of working-age people in 2030, Deutsche Bank's research based on UN forecasts show.
If the Deutsche economist is right, Asian economies are running current account surpluses partly because their financial systems are weak and their demographic clocks are ticking away and because the 1997 financial crisis has made them deeply suspicious about the stability of capital flows.
Meanwhile, the U.S., thanks to the credibility of its financial markets, ran an unprecedented $666 billion current account deficit last year, a record that may be breached in 2005.
The world's finance ministers must stop blaming one another for not doing enough to rebalance the global economy.
Instead, they must collectively ask themselves if there's a way to get capital flowing from rich nations to poor ones again.
The solution must involve a bigger role for the International Monetary Fund (IMF). Of what use is the IMF when Asian nations would rather seek safety in their bloated reserves, which Bank of England Governor Mervyn King has aptly termed as the Asian region's own "do-it-yourself lender of last resort?"
If nothing changes, Asian nations will only begin accepting current account deficits only when they're sure their banks won't be misallocating imported capital. Global rebalancing may then be in for a long wait.